Welcome to the Boardroom Governance Podcast. I’m your host, Evan Epstein. In this episode, I talk with Francine McKenna, a Lecturer at the Wharton Business School and a writer and commentator on the accounting, audit, and corporate governance issues affecting public and pre-IPO private companies. Francine spent more than 20 years in public accounting and consulting, including for KPMG/BearingPoint in the U.S. and Latin America, and at PwC. Since 2006, she has been an investigative reporter and feature writer. At MarketWatch she monitored and reported on public company accounting, fraud and financial investigations, and the financial reporting practices of pre-IPO companies. In this podcast, we talk about her personal and professional background, the recent $100 million settlement between Ernst & Young and the SEC, the $50 million fine to KPMG by the SEC in 2019, plus other conflicts involving the Big 4 audit firms. We also discuss frauds in public and private companies, the regulatory landscape for unicorns and crypto, the state of IPOs and some of the latest ESG trends. If you like this show, please consider subscribing, leaving a review or sharing this podcast on social media. You can find all the show notes on the website boardroom-governance.com and please feel free to subscribe to the Boardroom Governance Newsletter at evanepstein.substack.com
0:00 Intro.
1:37 Start of interview.
3:03 Francine's "origin story". She grew up in Chicago and graduated from Purdue in accounting but "she hated it." She began in internal audit at Chicago’s Continental Illinois National Bank and Trust. She later worked with KPMG/BearingPoint in the early 1990s. She also worked at JP Morgan where she focused on Y2K risk. Post Sarbanes Oxley she worked at PricewaterhouseCoopers LLP until 2006. She then pivoted as an investigative reporter and feature writer. At MarketWatch, and for The Wall Street Journal and Barron’s, McKenna reported on public company accounting, fraud and financial investigations, and the potentially dubious financial reporting practices of pre-IPO companies. She also started teaching at different universities. She has now joined full-time as a Lecturer at University of Pennsylvania Wharton Business School.
17:53 On Ernst & Young’s $100 million penalty by the SEC for employees cheating on CPA ethics exams and misleading investigation. To put this case into context, it's important to understand KPMG's case from 2019 ($50 million penalty by the SEC). Note this teaching case study on the KPMG/PCAOB scandal.
24:50 Criminal convictions in KPMG case.
26:01 EY's role in misleading the investigation of the SEC.
31:38 On KPMG receiving its largest UK fine (£14.4M) for providing false information about its audits of Carillion and Regenersis. On why the "Big 4 Audit Firms" are "Too Big to Fail."
33:16 What's really going on with the Big 4 audit firms? Audit services vs consulting services. "When there is tension between professionalism and commercialism, [the latter] will always win out." "You cannot restrain the heartless except via enforcement."
37:50 On lessons for directors in frauds of private companies. "I use Theranos as a warning case for students in accounting: it's the canary in the coalmine in case the audit profession doesn't evolve." There were three audit firms involved in the Theranos case: EY at the beginning but then walked away, then KPMG until they had a dispute about stock option valuations (staying only to do consulting), and PwC did forensic work winding down the company. None of them audited the firm, they only provided services. "They [the audit firms] made more money, with less liability, by providing other services [actively choosing not to provide auditing services.]" "Private companies avoiding going public [the deeper scrutiny] is the shape of things to come." How the JOBS Act stripped away some of the scrutiny over emerging growth companies [EGCs]. Some, like SEC Commissioner Hester Peirce, are in favor of this lighter regulatory approach.
47:22 On whether unicorns require a stricter regulatory framework. "We are seeing this [laissez-faire] attitude to the max in the crypto industry."
50:00 On whether Sarbanes Oxley had a negative effect on the US IPO market. "We should not have marginal/shady companies in the public markets." On the negative effect of relaxing the rules in the JOBS Act. "We should be talking about the quality of companies, not the quantity of listings."
55:26 On the difference between valuations (in private companies) and marketcap (in public companies). "I'm a big believer in the power of short sellers and activist investors to highlight [price inefficiencies and fraud] because they put their money where their mouth is." "The SEC has been very disappointing in both Republican and Democratic administrations in terms of actually calling accounting fraud by its name." On the role of whistleblowers.
01:04:02 On the rise (and increasing political polarization) of ESG. "I'm cynical towards it, firms are looking to get a piece of clients' wallets." "The trend first emerged in Europe with firms providing side audits like carbon emissions." "My head is tainted with the idea that it's all a big marketing ploy." The audit mandate in the proposed SEC's climate change disclosure rules. On the proxy proposals (like Exxon's) and greenwashing.
01:10:28 - Three books that have greatly influenced her life:
01:13:18 - Who were your mentors, and what did you learn from them?
From her time at Continental Illinois:
01:15:03 - Are there any quotes you think of often or live your life by?
01:16:12 - An unusual habit or an absurd thing that he loves: collecting metal objects.
01:17:47 - The living person she most admires: Judge Jed S. Rakoff, Jordan Peele.
Francine McKenna is a full-time Lecturer at University of Pennsylvania Wharton Business School. She teaches ACCT 611 and 613, Introduction to Financial Accounting for MBAs. She is also an independent writer and commentator and authors the newsletter The Dig, where she scrutinizes accounting, audit and corporate governance issues at public and pre-IPO companies.
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You can follow Francine on social media at:
Twitter: @retheauditors
LinkedIn: https://www.linkedin.com/in/francinemckenna/
Substack: https://thedig.substack.com/
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You can follow Evan on social media at:
Twitter: @evanepstein
LinkedIn: https://www.linkedin.com/in/epsteinevan/
Substack: https://evanepstein.substack.com/
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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License